Skip to main content

Table 8 Implied cost of capital and risk factors

From: Earnings forecasts: the case for combining analysts’ estimates with a cross-sectional model

  Realized returns CM AF CSAF HVZ EP RI
Market \(\beta \) 0.180 − 0.467 0.503 − 0.703 − 1.428 − 0.455 − 0.495
[0.106] [− 2.669]\(*\) [2.170]\(*\) [− 2.119]\(*\) [− 3.605]\(**\) [− 2.306]\(*\) [− 1.888]
Idiosyncratic Vol. − 0.126 0.161 0.184 0.636 0.262 0.533 0.417
[− 0.792] [2.514]\(*\) [4.446]\(**\) [2.518]\(*\) [1.496] [3.218]\(**\) [1.793]
Asset Growth − 4.871 − 0.497 0.181 0.143 − 1.637 − 0.417 − 0.769
[− 5.563]\(**\) [− 5.386]\(**\) [3.076]\(**\) [0.906] [− 5.687]\(**\) [− 3.521]\(**\) [− 4.986]\(**\)
Ln(Size) 0.057 − 1.331 − 0.781 − 3.736 − 2.411 − 3.236 − 2.465
[0.084] [− 5.863]\(**\) [− 10.407]\(**\) [− 5.168]\(**\) [− 4.326]\(**\) [− 6.518]\(**\) [− 3.515]\(**\)
Gross Profit. 5.627 3.013 − 0.461 1.439 − 5.151 − 0.209 − 3.012
[3.181]\(**\) [8.492]\(**\) [− 1.518] [1.881] [− 6.657]\(**\) [− 0.315] [− 3.280]\(**\)
Leverage − 0.065 0.107 0.064 0.032 0.132 0.059 0.057
[− 0.507] [4.738]\(**\) [5.936]\(**\) [1.136] [4.599]\(**\) [2.078]\(*\) [1.472]
CapEX − 5.660 − 3.527 0.105 − 2.412 − 4.845 − 2.680 − 3.659
[− 0.731] [− 5.016]\(**\) [0.151] [− 1.799] [− 4.032]\(**\) [− 2.384]\(*\) [− 3.458]\(**\)
Ln(BEME) 2.086 1.951 1.212 2.585 4.263 3.262 3.961
[1.925] [16.141]\(**\) [10.602]\(**\) [11.665]\(**\) [10.974]\(**\) [13.213]\(**\) [37.946]\(**\)
  1. This table presents the time-series average of slope coefficients from cross-sectional FM regressions of annual Composite excess ICC and ex-post excess realized returns (both in excess of the risk free asset) on the following risk factors: market \(\beta \), idiosyncratic volatility, asset growth, size, gross profitability, leverage, CapEx and ln(beme) (book-to-market). We estimate market \(\beta \) at the end of June for each stock and for each year using the stock’s previous 60 monthly excess returns (we require a minimum of 24 months, and excess returns are in excess of the one-month Treasury bill rate taken from Kenneth French’s data library). Idiosyncratic volatility is the standard deviation of the residuals from regressing the stock’s returns in excess of the one-month Treasury bill rate on the three Fama and French (1993) factors estimated yearly at the end of June using the previous 60 monthly returns (we require a minimum of 24 months). Asset Growth is the change in total assets from the fiscal year ending in year (\(t-1\)) for the fiscal year ending in (t), divided by (\(t-1\)) total assets. Size is the natural logarithm of market equity at the end of June in year (t). Gross profitability is the ratio of gross profits to total assets. Leverage is book value of debt divided by book equity. CapEx is capital expenditures divided by total assets from year (\(t-1\)). ln(beme) is the natural logarithm of the ratio of book equity to market equity at the previous fiscal year-end. We estimate ICC with earnings forecasts from the Combined Model (CM), raw analysts’ forecasts (AF), Cross-Sectional Analysts’ Forecasts (CSAF), Hou, van Dijk and Zhang (HVZ, 2012), Residual Income (RI), Earnings Persistence (EP), and Random Walk (RW) models. To compute the ICC premiums and the excess returns, we use the yield on the U.S. 10-year government bond. The Newey-West t-statistics are presented in parentheses. \(**\) and \(*\) denote significance at 0.01 and 0.05 level, respectively. Our sample covers the period from June 1986 to June 2012